Microsoft's fiscal Q1 earnings hit analyst targets

Microsoft's Windows franchise regained some of its vigor during the company's latest quarter, but that might not be enough to overcome the perception that the world's largest software maker is being outmaneuvered by nimble rivals whose fortunes aren't tied to the personal computer.

The results released Thursday were highlighted by a 7 percent increase in revenue that exceeded analyst estimates. The gains for the July-September period occurred throughout Microsoft's product lineup, which includes the ubiquitous Windows operating system, widely used programs such as Office, the Xbox 360 video game console and the Bing search engine.

The company's earnings for the fiscal first quarter rose 6 percent from last year to match analyst projections.

Microsoft's stock price has been held back by worries that it isn't adapting quickly enough as more people use smartphones and computer tablets such as Apple's iPad instead of desktop and laptop computers that run on the Windows operating system. Three consecutive quarters in declining Windows revenue reinforced those concerns.

That slump ended in the latest quarter as revenue in the Windows division crept up nearly 2 percent to $4.87 billion. The modest gain was slightly below the 3.2 percent to 3.6 percent rise in personal computer shipments during the quarter, based on estimates by Gartner and IDC.

Meanwhile, Apple sold more than 11 million iPads during the same period, more than doubling the number from the same time last year.

Most analysts believe sales of iPad and other computer tablets are going to keep accelerating at a rapid rate for the next several years. The trend is expected to decrease demand for PCs in households and businesses. In a Thursday conference call, Microsoft executives acknowledged the growing popularity of tablets will keep the pressure on the Windows division.

Microsoft is tackling the problem with the most radical overhaul of Windows since the mid-1990s. The next version, called Windows 8, will run on touchscreen devices. The redesigned system generated a positive buzz when it was released to developers, but the software isn't expected to hit the mass market until the middle of next year, at the earliest. Microsoft, which is based in Redmond, Wash., hasn't specified a timetable.

In the most recent quarter, Microsoft earned $5.7 billion, or 68 cents per share, for its fiscal first quarter. That compared with net income of $5.4 billion, or 62 cents per share, at the same time last year. The earnings matched the average estimate among analysts surveyed by FactSet.

Revenue totaled $17.37 billion – about $130 million above analyst forecasts. At the same time last year, Microsoft's revenue came in at $16.2 billion.

Although Apple's revenue in the most recent quarter surged 39 percent from last year, the increase didn't measure up to analyst expectations. The shortfall triggered a sharp drop in Apple's stock price.

Microsoft's challenges extend beyond Windows. The company has been struggling for years to catch up to Google in the lucrative search advertising market. It's been an exercise in frustration so far, saddling Microsoft's online division with operating losses totaling $6.5 billion in the company's last three fiscal years. The division's sustained another loss of $494 million in the latest quarter, down from $558 million at the same time last year. Online revenue rose 19 percent to $625 million.

Executives assured analysts in Thursday's conference call that they're determined to keep whittling the online division's losses. To do that, Microsoft will likely have to fine-tune its Internet search partnership with Yahoo. Since Yahoo began relying on Microsoft's technology for search results, the alliance has not been making as much money as the companies anticipated. The problems prompted Microsoft to extend a revenue guarantee through March 2013 – a year beyond the original deadline.

Microsoft is also counting on its just-completed $8.5 billion acquisition of video chat service Skype to make its online services more compelling in social networking and digital video.